So who does W.W suggest we should vote for in order to help remedy income inequality? Someone who would take votes from Obama and help give the election to Republicans? A new Nader? Are we to believe that W.W. has a solution he/she (I'm betting he) isn't telling us about? I have plenty of complaints about Obama, but nothing that comes close to making any Republican seem like a viable alternative.

Well I liked the post W.W. I thought it was rather original.
This is actually a criticism that many on the right are making - that stimulus didn't go to those people who are really hurting but instead to political donors to the Obama administration, such as the green lobby or the united auto workers union rather than to poorer auto workers in the South. It made me think, and it stimulated a lot of discussion.

You realize of course that if that was the case, the inequality would not have worsened since the members of the Green Lobby or the UAW are part of the 99% not the 1%. But logic is not the strength of ideology.

The Republican claim is simply that whatever Obama did, it wasn't the right thing because the 99% aren't getting better. They would be the last ones to suggest that he should address "mechanisms that spread inequality" which would be a claim disgruntled left wingers would make because of the increased inequality. This is where W.W. is wrong. The Right Wing does not look at it as a fixed pie but that the richer should have got richer and so should the poor. Inequality is not a bad thing for the Right. At least for the ideologically pure.

Yes, it was original indeed because it puts a left wing criticism in a right wing mouth. :-)

UAW wages $39.68 plus $35.58 in benefits per hr. This includes janitors and lawnmowers, as well as actual autoworkers.

Toyota workers from around where I lived make half that. So yeah, not pleased that the president used their tax money to keep their overpaid competitors in business. And yes, they say so. And no, NC is not voting for Obama this time.

The average republican is also mad about having to pay to bail out banks, pay to have bail out irresponsible home buyers, have to pay for boondoggles for the rich like Solyndra. And there are a lot who just got their healthcare cut by Obama, after having served overseas.

It's always staggering to me how liberals have this abstract idea of the American lower middle class. They are in favor of them but they've never met them. Quick primer: they do not want to pay higher energy bills, they worry about their job being taken by an immigrant or outsourced abroad, and they don't care about the price of arugula. In the meantime, the country is run by a clique of people who look down their noses at anyone who shops at Walmart, owns a gun, or goes to church.

Inequality is not just about the top one percent. One of things I dislike about that most is the whole dishonestly of focusing only on the richest few rather than inequality across the spectrum. It's a way for some of the most privileged people in America to feel set upon.

Nonetheless, the portion of the population that is in the top one percent is not "republican", it dominates both parties, and who ever wins the election it's going to be the one percent in charge. Elections are about which little clique of rich people run our lives for us.

Apples and oranges. The inequality we are talking about in this article is between the top 1% and the 99%. Not the competitive inequality of wages between union and non-union which is between the 64.5% and the 67.8% or something like that. Equalizing them is not going to change the situation that ALL of that 99% is going down while the 1% is going up which is the issue at hand. There is no controversy on either side on the latter observation.

They are both debatable on their own but don't mix up the two. They can be discussed independently. Otherwise, it just obfuscates the issues and no solution comes out of obfuscation.

The rest of the rant some of which I agree with is not relevant to the 99% vs 1% inequality.

To be fair, that was something of a rant. That's kinda what you're going to hear from the conservative side of the population though.

This does factor into the divide between the top one percent and the rest though. The taxpayer money that gets funneled into green energy products does end up going, to a large extent, to lobbyists, investors, and CEOs - the one percent. Also, putting a price on carbon is highly regressive and hits rural and less well-off people the hardest.

If you go out into the heartland you're going to see "No High Energy Prices" slogans, just like the "Nancy Pelosi caused Recession" billboards that you see when you leave the liberal enclaves of California. She had their water diverted to save some tidewater slug. The slug might not be a member of the one percent, but the people who care about the extinction of slugs are.

The objection to unions is not just about different pay for the same work, it's about workers being forced to pay money to the DNC or getting the shaft from the government. This amount to a protection racket used to extract money from the 99 percent to pay for the politics of rich liberals. And the people getting UAW money to join the OWS protests might not be members of the one percent, but alot of them are their kids.

Then there's immigration. I'm in favor of immigration, but I don't fool myself into believing that I'm the one who will have to bear the cost of potentially being undercut in the labor market. Also, it will raise the divide between the one percent and the rest from the simple fact of adding more people at the bottom of the ladder to the statistics. That's a bad reason to oppose it, but it does at least bear directly on the issue of the blog.

The real thing that we are debating is whether there is a class criticism of Obama, and let me say there most certainly is. The prop-up the housing market money wasn't about bailing out the people who live in homes, it was also about bailing out the people who bought the mortgages to their homes. The Fed's policy of stacking the cards in favor of banks is trickle down economics. Raising taxes on the top one percent is about taking money from the richest few and giving it to the richest one - Uncle Sam.

But it's more than that, it's the idea that the middle class is being excluded from the cultural space by the rich. The chest-thumping patriotism of conservatives is partly about how, even though they may be poor, they are Americans. They might make as much money as the fingernail of a sheik, but they wouldn't bow to him because they are better than he is.

There's the sense that America used to be their country, one of small towns and the local church and the factory. But instead the country is run by urban, atheist, professionals. People who are far richer than they are.

The conservative class resentment is the person who comes back from Iraq to find that his tri-care has been cut, people are uncomfortable around him, and he can't get a job even behind a counter because his military experience is less important than the fact that he isn't bilingual. It's about how you can't smoke in a bar anymore, because rich people don't like the smell of poor people. It's about how the price of gas goes up, but the cost of hybrids is subsidized. It's real, and it's an important part of American politics.

I have no disagreements with any of the observations of problems affecting the middle class and sympathize with it but I think just like the liberals, conservatives blaming everything on atheists, liberals, conservationists, or anybody that doesn't have their belief system is part of the problem. The problem isn't that simple.

I get that people are angry, hurt, disappointed, frustrated, etc., and they want simple sound bites to blame. This cuts across conservatives and liberals. But I am not sympathetic to some parochial and small-minded frustrations because other people aren't as religious as they are or that they aren't as white as they are, as liberal as they are, as green as they are, etc. And blaming the people who aren't That is escapism fed by propagandists. Same thing happens on both sides.

The sooner we get out of the ideological sound bite problem definition and solution framing the better off we are.

Solyndra is a good example of how the corruption works but not as most people believe happened with the liberal "green agenda". The Solyndra principles themselves had very little political influence nor did they lobby that hard for the money and they didn't even want that much money.

The corruption in this case was basically from the politically connected land owners and developers who stood to gain from diverting that money through this channel. They are the only ones who benefited from this deal.

It is been happening every day all through the country whether it is for a defense establishment, infrastructure building near owned property, or whatever gets govt money. Solyndra is just another channel for that corruption.

But it becomes an ideological battle instead rather than citizens uniting against political corruption. The left thinks if they stop oil company favoritism and get rid of conservatives from power, govt works fine and the right think if they stop green energy and environment favoritism, and get rid of liberals from govt, the govt will be OK. This is why the corrupt win.

If the Tea Party were to start protesting against political corruption whether it is on the right or left or religious or not religious and the 1% started protesting against the political cronyism whether it is on the left or the right, there would be very little difference between the two (excluding the bigoted on either side).

Instead they take positions that are based on sound bites and are ideologically motivated. Furthermore, their petty biases, bigotry, intolerance all play into what they want. That is the problem. Govt is just a symbolic mirror of the people.

The ideological divide also prevent long-term solutions from being implemented. It is always knee-jerk reactions. Prices are going up so let us drill more or pipe more or whatever is the current slogan. When the price goes down, the same people couldn't care less about conservation of oil or alternate energy sources. That isn't an energy policy, that is a parent mollifying a 3-year old that throws tantrums when they don't get what they want.

Slogans are nice and cute but the political leaders aren't taking the leadership to go beyond sound-bites with integrity and people aren't looking at themselves in a mirror to see the problems they create. Politicians definitely do not have an incentive to educate the people. Ideological divide helps the politicians and the 1%. Its is we, the dumb citizens, with our petty minds that is the problem.

How the heck do you fix that without ideological battles or cutting our arms to save a toe?

Let me kinda agree with the point you are making. I object to the idea that rich/poor is synonymous with right/left in this country, and if you are saying that a lot of rhetoric on both sides comes down to "which little clique of rich people run our lives for us", then of course I agree. When you say that we, as citizens, need to better educate ourselves if we want to stop this, the I also agree.

I don't think that all cultural politics can be seen as a distraction from economic issues, "real issues". This is a common trope of the left to explain why poor people don't really like them very much. Cultural issues matter. If the French peasantry wanted to cling to their religion, Robespierre shouldn't have tried to take it away. If Americans want their kids to say the pledge of allegiance at the beginning of the school day, that's an issue that politicians should support. There's a problem if it's decided on the basis of the side who thinks that's too jingoistic is richer and more politically active, rather than democratically.

I dislike identity politics too. I dislike the idea that a republican can get away with insulting a person serving abroad, while he stands in an air conditioned hall in Florida, because the soldier is gay. I dislike the idea that democrats can call a black person an uncle tom for wanting their kids to have another option aside from the DC public school system.

Both sides turn a blind eye to the corruption, pettiness, and idiocy of their own. I just want the left to ask why it's okay to force Boeing not to bring jobs to our part of the country, why it's okay to talk about raising the price of carbon without talking about what it will do to rural America, and why it's okay to dismiss any political sentiment that comes from a person's faith.

In the meantime, I will gladly call Gingrich a narcissistic blowhard for claiming he can lower the price of gas, Santorum a small-minded prick for attacking a soldier, and Romney a disingenuous hack for blaming the economy on China.

I agree with most of everything you have said in the previous. With the last question, we are much better off asking is the country's policies benefiting the interests of average Americans? If not what should it be? The reason the distinction is important is because the answer to your question from the party opposed to the President is always, no, he should go and that is the solution. No, it isn't. For neither side. That is just a lazy ideological populace that thinks just getting our party in power is the solution. I expressly reject that.

The population needs to figure out what is it they want, not in sound bites, but in clear policies. Are they willing to give up welfare programs, what kind of tax cuts do they want? How are they going to protest boondoggles irrespective of which party is doing it?

But none of that happens. It is like two religions who have stopped thinking and just rooting for their team. Neither team has a monopoly on right ideas if we go down below the demagoguery and populism. And yet, the parties battle only at that level and point at the other as the problem. There is no solution until they do that.

As I have mentioned before, the issue is not rich vs poor but labor vs capital. Capital rules at the moment. Labor on both sides suffer (and no, labor does not mean unions, it is people who work for a wage providing human capital and not providing or managing money). Many on the right have been brainwashed by a 1% that capital (which the 99% don't have) is the solution to all problems and that freeing capital will somehow trickle it down to labor (despite so much evidence to the contrary). It doesn't, it further widens the gap. Many on the left have been brainwashed by another 1% that punishing people with capital and rewarding labor with unions is the solution that makes everybody rich (despite evidence to the contrary). It doesn't, it weakens the economy. Both camps are wrong. But each ones points to the other and wants to move to its wrong solution.

Unfortunately, there is no tolerance for ideology-neutral solutions in this climate. And that is the problem on both sides.

Wait, the "socialist" president presided over staggering economic inequality? The American Enterprise Instifrackingtute is criticizing Obama for what, not redistributing enough wealth? Implementing an economic plan that benefits Wall Street?

This is an unrelated question, but how do you get the italics to do emphasis? I dont know how to do it, and when I want to emphasize a content of my post, then I have to use Uppercase which sounds like Im shouting!
Thanks in advance...

Very few Americans understand that inequality fell during the recession.

It fell from what to where?

JACOB HACKER: It says how much did people at different points on the income ladder earn in 1979 and how much did they earn in 2006 after adjusting for inflation?

It exploded at the top. The line for the top one percent, it's hard to fit on the graph because it's so much out of proportion to the increases that occurred among other income groups including people who are just below the top one percent. So, that top one percent saw its real incomes increase by over 250 percent between 1979 and 2006. Yeah. Over 250 percent.

WW writes:
"It seems to me that this is a potentially effective criticism of Mr Obama's leadership. Income inequality naturally falls during recessions. But rather than consolidate gains in income equality by addressing the mechanisms which have pushed inequality to Gilded Age levels, Obama has again and again come to the aid of Wall Street, so much so that the gains from the Obama recovery consist almost entirely of the 1% recouping their losses from the great recession."

First of all, this "criticism" isn't from "Mr Pethokoukis, and conservatives" but WW sets up a criticism that they did NOT make and then goes on to say why it wouldn't be fair criticism on their part.

A moment of reflection will make one realize that no self-respecting right winger is going to write "But rather than consolidate gains in income equality by addressing the mechanisms which have pushed inequality to Gilded Age levels" because ideologically they don't believe Obama or any other politician SHOULD be doing anything as socialist as try to address the mechanisms that have created inequality. This would be a criticism that is likely to be made by a Left Winger instead if at all. Santorum or any other candidate would never make that kind of a criticism.

The author manufacturers this potential left-wing criticism and says it isn't fair for the right-wingers to do? Too many beers while writing?

Note that Mr Pethokoukis has been very careful in his criticism and has made a completely different criticism than the one posed by WW in "the art of winning by pressing every available advantage". Not about reducing inequality but of the recovery not reaching the 99% to paint Obama as ineffective (without saying how he should have done it) for a general recovery. This is what is likely to be picked up by the GOP candidates including Romney for the narrative that the recover is ineffective and glossing over the income inequality.

Since the main premise of this article itself is flawed, perhaps WW might want to consider rewriting or pulling this ill-thought out article once the hangover subsides. :-)

"Or maybe it was done intentionally to further illustrate how the right wing describing Obama as a communist and on a 'class warfare' crusade both utterly ridiculous and completely unfounded."

That's dirty politics for you. Remember how "Bush is Hitler" "invented" a war so American soldiers could go to Iraq and purposely kill innocent women and children?

And who can forget how Bush purposely "ignored" the Katrina disaster in New Orleans so that poor black people would drowned?

And of course, 9/11 was all a neocon plot to go to war against the muslim world for oil.

Obama isnt communist. He is liberal which in these times is mostly an elegant variation of the old fashioned communism, socialism, progressivism - all variations of collectivism. Different methodology but all based on the same principle: tyranny of government over individual liberties.

Yep the same was done to Bush, so the dems are getting payback, alls fair in love and war. You have to admit that it's ironic that inequality has increased with Obama while at the same time supposedly enacting a class warfare.
Liberal to me means that government gets out of the way of my individual liberties hence why I would never vote for a social conservative, who seem intent on how we should go about living our lives.
We live in a collective globalised economy whether we like it or not.

I say again. KISS keep it simple stupid. Flat tax. No loopholes for the rich to have a lower tax rate. Also as a desirable side effect, get rid of all the overpaid tax lawyers, tax bankers, tax accountants, etc.

Also, every flat tax that has been proposed has been severely regressive compared to current plan. In other words, it would increase taxes on people who have the highest marginal propensity to consume, which fuels GDP growth, while lowering taxes on those with the least marginal propensity to consume, encouraging them to either save (which has virtually no macro benefit) or invest (in a diversified portfolio of assets of which a large portion would be outside the U.S. again with no real benefit to our economy).

"every flat tax that has been proposed... it would increase taxes on people who have the highest marginal propensity to consume"

Absolute falsehood.

"encouraging them to either save (which has virtually no macro benefit) or invest (in a diversified portfolio of assets of which a large portion would be outside the U.S. again with no real benefit to our economy)."

Look up the fair tax, as proposed by the hoover institution, and you'll find that it exempts the poor - the group with the highest marginal propensity to consume. Or think about the fact that if you announce that a consumption tax is coming into effect, you will stimulate consumption prior to the tax as tax avoidance. And people don't save OR invest. And that was a pretty quick dismissal of the virtue of reducing the current account balance ahead of the demographic cliff we're headed for.
Now, I do not support a fair tax. Although it is significantly better to the poor, I do believe that the upper quintile should pay a higher rate than the middle quintiles. There are other proposals out there, by the way, such as the X-tax. Nonetheless, I think that someone like Hall or Rabushka deserve a less blase response to their proposals.

An oversimplification of the tax policy doesn't allow for compensation of externalities, both positive and negative. Are you willing to give up your tax deductions, or just make everyone else give up theirs?

Yes, every flat tax proposed by the republican candidates for presidency has been more regressive. Has the cbo or tax policy center graded one that is more progressive? If so, please share.

Saving is not investing. Cash in a deposit account is not an investment in anything, except indirectly through bank lending. Think about the allocation of assets of a senior citizen or millionaire - cash, bonds, commodities, and globally diversified equities. No, buying shares of a Brazilian mining company does not benefit the U.S. economy, but buying cars (consuming) made in the U.S. with steel made in te U.S. that is made from ore sourced from Brazil does benefit the U.S. economy.

A flat tax with a bunch of exemptions isn't a flat tax. It's just a system that is flatter by eliminating other people's exemptions.

I disagree with the premise of a flat tax. But that's because I'm not ignorant or in denial of the existence of positive and negative externalities or the concept of continuously decreasing marginal propensity to consume. If a local, state, or federal congress decides that they want to encourage a particular kind of investment that improves overall utility or tangible infrastructure, why shouldn't they? This is the advantage of collective representative government - to aggregate interests on a macro level where micro economic market inefficiencies break down.

The X-tax (the one I mentioned above) is very progressive, was the preferred tax policy of the G. Dub administration, and was developed by David Bradford, who was on (I believe headed) their CEA. So yes.

It's essentially just a fair tax with more than one rate. That may not be "flat" in your definition, but the issue that it is an "optimal tax" for revenue purposes.

"If a local, state, or federal congress decides that they want to encourage a particular kind of investment that improves overall utility or tangible infrastructure, why shouldn't they"

Because that's not what they do!!! We do not live in the world of the omniscient incorruptible central planner buddy. Do you honestly believe that the exemptions or deductions in our tax system have the slightest resemblance to some high-minded attempt to control for externalities? They're just handouts. I hate to break this to you, but the government is not mom.

So which externalities would you like internalized through the income tax code?

You said every proposed flat tax, "would increase taxes on people who have the highest marginal propensity to consume."

Please point to one such proposal.

"Cash in a deposit account is not an investment in anything, except indirectly through bank lending."

That exception swallows your rule. Your point was that consumption is preferable to savings because savings are largely idle. That's simply not true. Your savings don't sit in bank vaults.

"No, buying shares of a Brazilian mining company does not benefit the U.S. economy, but buying cars (consuming) made in the U.S. with steel made in te U.S. that is made from ore sourced from Brazil does benefit the U.S. economy."

Compare apples to apples. Buying shares of an American mining company does benefit the US economy but buying cars made in Korea with steel made in Korea does not. Though even that isn't entirely true. Is Korea has a comparative advantage when it comes to cars, it's better for Americans to buy Korean cars while US resources are devoted to activities in which the US has a comparative advantage like internet services.

That was like reading my own post from years back. I once favored the X-tax but have since switched my support to a flat tax. The X-tax is less "optimal" than a flat tax. Multiple brackets are more political feasible though.

What intrigued me about Bradford's plan is that he keeps the corporate tax rate at the same level as the top personal income tax rate to discourage tax arbitrage. E.g., if the corporate tax is lower, it would encourage non-monetary compensation like health insurance and deluxe hotel suites. Having said that, I've come to the conclusion that if we're going to keep the personal income tax around, eliminating the corporate income tax is a lesser evil to keeping it in order to discourage this perverse behavior. There's just too much going against the corporate income tax.

Yeah, I always thought have the BTT so high was kinda weird. It would have fewer adoption issues if the rate was the same as one of the lower bracket rates. We don't have to get it perfect David.
Although, I was wondering what you thought about what I said before. If we say we're going to introduce a consumption tax, won't people consume ahead of time and therefore the perfect timing for it would be in the middle of a recession?
I guess I still like the X-tax cuz I still love puppies and progressive taxes (don't they just make you feel all warm and fuzzy) no matter how much I try to come off as a cynic.
And the CIT is horrible, thank you for being someone out there who gets that. Some times I feel like I'm so terribly alone. Do you have any good numbers for the consumer/employee/shareholder effective tax rate, or is it literally that impossible to calculate.
And Rest In Peace David Bradford. We'll miss you.

It's possible to design a consumption tax that prevents tax avoidance through consumption before implementation. The simplest would be to keep our current code but abolish the cap gains and dividend taxes but that's politically unfeasible. Alternatively, you can eliminate the corporate income tax, tax personal unearned income as earned income, and allow unlimited capital loss deductions. I think that could be politically popular. Even if you were going to implement a sales tax or VAT, you can rebate the taxes paid with any withdrawals from qualifying accounts that you had at midnight on the day of implementation.

Flat taxes are progressive. You can design a flat tax that's more progressive than our current code. E.g., 40% flat tax with a $40K deduction.

BTW, if you want a consumption tax with multiple brackets, I'd recommend the D-VAT (Digital VAT). Everyone gets a card that provides instant rebates progressively. So your first $10K in purchases may be tax-free, next $10K are taxed at 5%, and so on until the top rate at which point the card offers no rebate. Privacy nuts would be outraged but you can still allow people to file their taxes as an alternative.

"Do you have any good numbers for the consumer/employee/shareholder effective tax rate, or is it literally that impossible to calculate."

Don't know about that breakdown but I saw a CBO report with imputed corporate tax rates by income (this website won't let me link to it). The top 0.01% pay 13.9% in corporate taxes. The bottom 20% pay 0.04%.

OK, Serious question: does cash count as inventory when calculating GDP? I don't follow how S=I by definition, when I= residential I + nonresidential I + inventory. Savings is income minus consumption, but not all savings is invested in residential, nonresidential, or inventory. Some is held as cash, some invested in equities, some in bonds and commodities. Buying shares of a company, placing in a savings account, or buying bonds do not directly contribute to GDP, do they? Are you saying S=I in the extreme long term, since cash accumulation is finite?

So now we've gotten to the root of it. You are infinitely cynical about our form of representative government in general. I get the impression you've never actually seen or been involved in state or local government or economic development. It's not all handouts for country club golf buddies. Tax incentives are often directly ties to increased direct employment, capital investment, infrastructure investment, and other tangible benefits. If a company is going to locate a $500 million dollar, environmentally compliant manufacturing facility on a brownfield site in an economically depressed area, directly employing 1000 people in high paying jobs, improving or extending water and sewer infrastructure for the community, utilizing existing infrastructure, doesn't that justify an income or property tax reduction if that's what the elected representatives choose?

That is how these things come to exist - In a public forum with mandatory public comment periods, voted on by democratically elected representatives. The debates are often contentious and sometimes the entire projects fail, but that's how it goes.

And so you throw out the entire tax code and start over with your idealized flat tax, would you then have to pass constitution amendments to preclude elected officials from offering new tax deductions or grants or otherwise participating in economic development?

It would seem so, which leads me back to the root of this (and probably all subsequent) disagreement: you are infinitely cynical of representative government and Democracy. The only thing separating your libertarianism from anarchy is a short list of arbitrary functions of of government that not even you can deny are public goods.

I'm not trying to be inflammatory or disrespectful. Lots of people feel the way you do and I think it is a serious problem because conviction of infinite corruption and incompetence can trump any argument of finance or economics or psychology of any policy. If you're gonna play that card, then there's no point discussing any of these matters because you can always claim that government is inherently, infinitely, and inevitably corrupt, incompetent, and inefficient, offsetting any expected benefit. So the logical conclusion of your stance is anarchy or a night watchman caricature of libertarianism.

Examples of externalities that should be incorporated into the tax code are direct capital investment in infrastructure, employment and direct capital investment in sustainable industries, brownfield redevelopment, investment in depressed communities, utilization of existing underutilized infrastructure. These activities have tangible and intangible benefits to society, in some cases directly reducing fiscal obligations of government.

And so you flatten the tax code and you preclude elected representatives from tinkering with it. Will you preclude them from offering grants or loans or any other economic development benefit, even if approved by a majority vote in an open forum with mandatory public comment? Because that's how it would work. And it would be less efficient than just passing legislation to incentivize all such activity that meets certain criteria through the tax code.

Ok, I see you answered my question. You're saying in the extreme long term, savings equals investment. I'm saying in the short term, a paradox of thrift is real and even in the long term, in a global economy, not all of that will be invested domestically.

You also mentioned Pareto efficiency as the justification for free flow of such capital internationally. I don't disagree, in general. I'm not a mercantilist in general. But when looking at the benefit of countercyclical policies to recover from recession, I think it's worth noting that capital flows outside of the us less preferable to flows inside the U.S. And just as there is a marginal propensity to consume that determines the multiplication of the benefit, there is a marginal propensity to invest savings and independent marginal propensities to invest domestically and internationally. Only in the extreme long term are international investments stimulative. But the nature of the current situation, a liquidity trap, is a short term one.

Build a plant that needs natural gas in an area that doesn't have it. Company pays to have a large capacity gas line extended to the site. Now all nearby residents can tap in. Positive externality. Same logic applies to water, sewer, other utilities and many other public goods - basically all are made more cost effective by economies of scale directly attributable to the company's investment.

Savings still equals Investment at any point in time.
The paradox of thrift is that if savings in relation to income raise higher than the relationship between investment and output, an increasing marginal propensity to save will not lead to higher total savings.
It's a long time since macro, but I'm fairly sure about that.

Excellent points. I think the main concept that opponents of Government involvement for ideological reasons miss is "leverage". The best spent dollar from a government is when the investment is leveraged via scale (as you provide examples for) or network effects (viral spread of benefits - higher local employment leading to more consumption and tax revenue, improved infrastructure leading to more plants, etc).

The worst use of a Government dollar is when a company leverages their dollar via Government capital (as happens in many defense industries or with banks at times).

It seems to me that a calculation of leverage in the investment should be an important consideration in deciding the efficacy of Govt spending.

The reason that private companies cannot necessarily engage in such leveraged plays is because the total returns have to be fully monetizable, whereas for the government the returns may be in non-monetized public good (but quantifiable as for example how much it would have cost the Govt to build a natural gas supply line to the residents).

But ideological debates depend on the simple arithmetic that a dollar of Govt money is less than a dollar of private money because of inefficiencies and therefore...

The bailout of GM was a leveraged play in total returns (via networking effects), but the total return components (e.g., potential bailout of PGBC) could not have been monetized by any private entity and yet we continue to see a simplistic returns calculation for Govt's money.

To be completely fair to Crimson over here, there was a reason the Breton Woods system had such tight capital controls- to allow them to engage in Keynesian stimulation of aggregate demand.

I was referring to the Savings Identity - governmental borrowing plus private investment must equal private savings plus foreign investment. What you are talking about is how lower investment will lead to lower savings. Keynes.

OK - I do know a thing or two about how a bill becomes a law, having not only watched schoolhouse rock, but also done work lobbying for NPs (state govs of CA and VA). I must say that I was surprised by the intelligence and diligence and non-partisanship of the state VA government - I would say the opposite of California. It is precisely because the budget was so small that there were few vectors for corruption and less vitriol over politics.

Now, what I want to point out is that a democracy is a government of the majority , and that's the interest it serves. Look at something like the mortgage interest deduction, which is essentially just taking money from people without homes and giving it to people with homes (although actually banks but whatever). Democracy at work. It does not serve any public benefit - it is simply rent seeking.

Not sure if you have experience in creating companies or creating business models but a company that is in the business of building plants for itself (say auto or heavy machinery or whatever) will not want to be in the business of selling/supplying gas either directly to consumers or to intermediates.

Many reasons. That is not the business they need to focus on, the RoI on that part of the business will dilute their balance sheets if the margins are lower (as would be in utility business), and it takes time and effort to set up that business process which may not be worthwhile for them and they may have no infrastructure for. If they want to diversify for a strategic reason, then there are likely other opportunities to diversify.

But even so, theoretically if a company could make that case, then there would be such a development on its own. The premise he is taking is an area where there is no such development because no company has found it worthwhile to be in the plant and natgas supply business for the area. Typically, vertical companies don't make such major decisions to include all the side-businesses they can get into as a matter of core competency, execution and focus unless that side-business was an extremely lucrative one which could stand on its own and it served some strategic purpose.

You're grasping. The company probably wouldn't own the line or want to be in the natural gas distribution business. The utility would own the line and control the distribution of gas through it.

While they're changing their new neighbors for connecting to the gas line, I guess they should charge all of the citizens individually for all of the scale benefits that lower the costs of providing services.

First off, concentrated benefits/diffuse costs to alot of this stuff, you're going to get government failure.

Second, it always annoys me when people start talking with such awe when something or other that a company does has some sort of benefit to those around it. That just kinda happens naturally and so often that it doesn't warrant unique treatment in the tax code. We could just tax your hypothetical natural gas plant less in general, or just all businesses less in general and you'll get more of the kinds externalities that businesses produce.

It's just far too difficult to try to find all the externalities that businesses produce and there are far too many vectors for corruption. You get too many Solyndras, Volts, Ethanol Subsidies, Sugar Tariffs, MITIs, etc.

And taxes aren't just taking money away from one group of people, they have significant deadweight losses and the actual tax burden falls on people in unexpected ways. The tax needed to pay for your pigovian subsidies is payed for by a tax that causes far more economic destruction than the subsidy itself, and generally, I would argue, more than the benefit of even a rather well thought out subsidy.

So I looked into the savings identity to try to reconcile this theoretical rule with what is actually happening in the real world. As I suspected, the identity and rule only hold in the very long term. As I just learned (or forgot from macro and relearned) this is part of "equilibrium theory". The following pretty much sums up my reaction to this theoretical abstraction:

Keynesian and Post-Keynesian economists, and their Underconsumptionist predecessors criticize general equilibrium theory specifically, and as part of criticisms of neoclassical economics generally. Specifically, they argue that general equilibrium theory is neither accurate nor useful, that economies are not in equilibrium, that equilibrium may be slow and painful to achieve, and that modeling by equilibrium is "misleading", and that the resulting theory is not a useful guide, particularly for understanding of economic crises.[9][10]
Let us beware of this dangerous theory of equilibrium which is supposed to be automatically established. A certain kind of equilibrium, it is true, is reestablished in the long run, but it is after a frightful amount of suffering.
—Simonde de Sismondi, New Principles of Political Economy, vol. 1 (1819), 20-21.
The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again.
—John Maynard Keynes, A Tract on Monetary Reform, 1923, Ch. 3
It is as absurd to assume that, for any long period of time, the variables in the economic organization, or any part of them, will "stay put," in perfect equilibrium, as to assume that the Atlantic Ocean can ever be without a wave.
—Irving Fisher, The Debt-Deflation Theory of Great Depressions, 1933, p. 339
Robert Clower and others have argued for a reformulation of theory toward disequilibrium analysis to incorporate how monetary exchange fundamentally alters the representation of an economy as though a barter system.[11]
More methodologically, it is argued that general equilibrium is a fundamentally static analysis, rather than a dynamic analysis, and thus is misleading and inapplicable.[12] The theory of dynamic stochastic general equilibrium seeks to address this criticism.

It is sort of like the Efficient Market Hypothesis from the Chicago School. They have assumed the exact opposite of reality as a postulate and derived a lot of useless corollaries from it.

One can assume the exact opposite that the markets are never efficient even asymptotically in the long term and that information flow is never perfect and instantaneous and have at least the same predictive (or not) capability as the Efficient Markets Hypothesis.

The alternate can even accommodate the black swan events that Efficient Market Hypothesis has problems with despite Fama's ideological beliefs and explanations that the financial meltdown was a consequence of rational decisions made in an Efficient Market and that with zero government intervention the financial industry would have corrected themselves and become healthy within two years or so. It must be nice to sit in an ivory tower and make contra-factual pontifications.

Blargh, No
Savings equals Investment because saving is defined as equaling investment. Note that inventories are counted as investment in this sense.

The problem with the bees is that they work hard producing honey, but no one consumes the honey,, so their inventory of honey increases, but doesn't clear, so the honey business becomes unprofitable, and so the queen lays off the bees, and then no one can buy honey.

The whole hive tries to virtuously save, but instead total savings end up falling in tandem with investment. The paradox of thrift. At all times, though, savings equals investment, it is simply that their investment decreases in value do to them all saving. Savings equals investment.

What you are referring to as wrong is Says Law, the theory that supply creates its own demand. Or the theory that demand and supply will always find an equilibrium price. Supply and demand eventually find equilibrium, and the honey inventory clear, but only over the long term.

But again, like the post before, we are not talking about aggregate demand. We are talking about structural problems.

In Europe right now there is definitely a problem with aggregate demand, but there are also structural problems. These include an inefficient tax code, government ownership of businesses, poor labor law, and generally too much meddling by the state. You are arguing for an inefficient, as in non-optimal at raising revenue, tax code - this is a structural issue.

You do not have to think that Europe doesn't need more AG to think that it needs a better tax code. In fact I think it needs more AG and I wish that the ECB would print money.

Now, you also make the point that one of the sub-optimal things you want in a tax code is to promote consumption and deter investment. I assume that you want this to be a permanent part of the tax code. So you're going to get the problem that when the economy is overconsuming and undersaving, not like now but like in the last decade, you're going to create malinvestment. This is what the fed did with those low interest rates.

Just to be clear, the bees bought stock in the honey-hive, which decreases in value because of a lack of consumers. And here's a good quote...
"Savings equals Investment" - John Maynard Keynes
What you want is delta savings does not mean delta investment

Crimson starts with comparing PERSONAL SAVING vs PERSONAL INVESTMENT as choices to individuals with loosely defined definitions of cash (or liquid) assets as SAVINGS and non cash instruments as INVESTMENT. Obviously they are not same or equivalent.

RR and pub start using the AGGREGATE SAVINGS (of the population) and INVESTMENT (within an economy) defined as identity since everything not available for INVESTMENT is defined away as not part of AGGREGATE SAVINGS.

Looks like Crimson interprets this identity as an equilibrium condition (there is a theory of IS or Investment-Savings equilibrium) which actually has nothing to do with Investment or Savings anymore but has to do with total spending vs total output equilibrium points which has been discarded as representing any dynamic condition and so not very useful for the real world - Crimson's objections.

Still the flawed model has been used to make claims on both sides as to whether Govt stimulus/deficit spending increases or decreases output or aggregate demand. On one hand, if the interest rates rise to a new equilibrium (even though the model is not able to represent such dynamic conditions), it may crowd out private fixed-investment and reduces output in the long term.

Keynesians counter that private fixed-investment will actually increase as GNP raises in the short-term with the stimulus as private capital goes in from increased business confidence and raising profit expectations (they are capitalists after all) multiplying the effect.

But all that depends on another parameter in the model - the Liquidity-Money Supply curve/equilibrium. The flatter it is, the less increased output affects interest rates and so less crowding out of private fixed-investment and more right the Keynesians. The more vertical the LM curve, greater the propensity for the interest rate to jump with output and more the crowding out of private fixed-investment that hurts long-term output.

The problem is it is a static model so all of the curves are only valid only at some point in time not when they are moving around from point of time to another.

In our current situation, one group wants Keynesian stimulation and lots of it and another group wants tax cuts and lots of it. The Government is already in a huge hole to afford the level of stimulus needed even if the LM curve was flat. The tax cuts really have to be directed at both private investments and individuals to stimulate both supply and demand but the Govt is in too much of a hole to cut taxes enough to make a difference.

Meanwhile, the Fed is marching to its own drum, trying to keep the LM curve flat with interest rate manipulations, trying to push personal savings into personal investments with risk and flooding money available for private fixed-investment for short-term spike in output to jump start.

What all this has to do with the long-term tax policy for the US... I have no clue because the equilibrium is always changing in unpredictable ways!

The only solution as I see it is an adaptive and self-correcting tax system that will change (with whatever damping is needed to reduce volatility in tax rates) with current economic conditions and no meddling from politicians where the arbitrarily picked numbers like 9% or 40% or $60k deduction, etc are all picked computationally to satisfy an agreed upon revenue but distributing the burden amongst labor, capital and corporate depending on the conditions with no ideologies or academic and incomplete economic models to influence it.

Ok. Forget bees. I have income. Income minus consumption = savings. Some of my savings goes to residential construction (assume I'm building my house myself in my spare time). The rest of my savings goes into a bank account (my local bank). Their capital ratio increased. How do reconcile that with your identity?

Go a step further. Say the bank uses my deposit to make a loan to a business. The company could just sit on the cash or it could make a nonresidential investment or use it to fund operations to build inventory.

Investment = nonresidential + residential + inventory.

Please explain how your identity must hold true in these scenarios, instantly, automatically.

To be honest, I know S=I like I know e=mc^2. It was taught to me in school and I have a working knowledge of what it means, but if you really wanted to delve into the nature of energy or mass I'd be somewhat at a loss. I think common might be right that we are using different terminology. I do appreciate this for making me actually go and look up this stuff.

I just want to make it clear though that I don't have a problem with the government running a deficit during a recession, and my problems with Keynesianism have nothing to do with the math of promoting AD, just the possibilities for corruption and government failure.

The problem Crimson is pointing to is the role of time in modeling. When you ignore time, the model including the identity become meaningless because the assumptions behind it aren't true anymore.

For example, in the model, you are correct that an increase in personal savings MAY lead to a decrease in aggregate savings but let us look at why ... in theory.

Let us say you consume less and save more. Because of less spending on your part, it decreases the income correspondingly for somebody. If they don't decrease their spending, then their savings decrease correspondingly and so there is no aggregate savings. But typically people decrease their spending when income falls but not as much as the income fell, so their savings get squeezed by some amount but their reduction in spending reduces someone else's income, etc. So the aggregate savings across the population COULD potentially even fall depending on how it propagates.

This is far too simplistic for reality. Because it assumes instantaneous and proportional propagation. That never happens and the "hysteresis loop" for propagation may be quite wide. In other words, my increased savings and less spending may not have an effect on incomes for a long time or may never happen if the companies I spend less on reduce their margins instead (and don't decrease their dividends) because they do not need to reinvest it to keep their market share in the short term. Up to a certain point when they may have to reduce inventory and that propagates. But the point is that such propagation takes time but the model assumes instantaneous propagation. But a lot of other things can happen meanwhile that can prevent or stall propagation.

If you define Investment as total money potentially available for investment rather than just money deployed in investments, then the identity holds because it counts money sitting with Fed from the banks, their capital reserves, etc., as investment. But if the banks aren't lending or just replenishing their capital from bad bets earlier, increased savings may result in no productive investment for a while. Just defining that money as investment doesn't make it productive!

Consumption instead of savings could potentially be more stimulative in that case since that brings the money directly to the companies bypassing the banks but not enough if the companies just sit on that increased income like Apple does with most of its margins.

Government spending can then become an alternative for confidence to stimulate the economy to bring consumer and corporate confidence back.

This is why it is not purely math/science/economics relationships. The business confidence, consumer confidence, etc., play a great rule in how and whether these things propagate.

In the financial meltdown, we had a loss of confidence that snowballed, from banks to people to companies and the money movement almost came to a standstill (relatively speaking). Cutting taxes for companies doesn't help if they don't see an aggregate demand. Cutting taxes for people doesn't help if they don't feel confident enough to spend. They may save but that savings is not going anywhere as productive investments that stimulate the economy but into building up damaged balanced sheets for banks. Money velocity has slowed down.

So if you introduce propagation time, then some of the assumptions no longer hold in the simplistic model. The income reduction may lead or lag behind increased savings. Investment could lead or lag behind savings. And opposite relations may hold at times in the short term.

And all of the above is keeping money supply constant. None of what Crimson said increases money supply (well, it depends on which definition of Money Supply). But the Fed could increase the money supply itself to spur short-term spending at the expense of short-term saving (low interest rates reduce appetite for savings).

What is frightening is that people are using the corollaries of the simplistic models to make policy (saving vs spending, taxing vs stimulating) without considering the reality context. Any ideology can be supported by a broken or simplistic model. Cutting taxes doesn't automatically increase confidence or spending. Government spending doesn't necessarily crowd-out private fixed-investment in the short term.

In the recessionary context we have which is a crisis of confidence, the issue isn't whether Government stimulus won't help but whether Government can spend enough money to make a difference in confidence. The second world war was a huge stimulus economically. The government would never have been able to justify that much spending in peace time to stimulate out of a depression. Perhaps that is why some people want to go to war now rather than support spending same amount of money on infrastructure.

"and my problems with Keynesianism have nothing to do with the math of promoting AD, just the possibilities for corruption and government failure."

Then we need to fix that as much as possible not assume it is impossible and therefore assume there is no need for Govt spending. As explained in the previous post, government spending is a proxy for building confidence or risk-taking for amortized good both of which aren't possible by private industry on their own (this is the false ideological assumption that works in favor of the 1% but not necessarily the general public).

That is why we see most of the advancements in technology today from the investments in DARPA, NASA, etc. If private industry has developed on their own, the Internet would have stalled with the mess of patent litigation that is choking advancements in the mobile space today as each company tries to optimize for itself and choke others out. Some people again blame the Govt for the patent mess but even if the patent office was privatized the core problem would not go away.

You need some advancements that need to be shared, some infrastructure that needs to be shared because the RoI isn't there for the private industry to justify the business case or to take collective market risk. Except in theory like Romney's solution for GM requiring Govt loan guarantees (to benefit the private industry at the expense of taxpayers) or theoretical solutions like RR's above that perhaps the natural gas based auto manufacturer would get into the retail gas distribution business.

While I share the concerns of and distaste for inefficiency and corruption, we need to work towards removing that not give up and destroy that useful tool. But we are held back by ideological differences that takes failure as a premise.

The problem with the first part is that that savings is not equal to investment, although you insisted that it must be, by definition. The second and other alternatives just reinforce the impracticality of the "Savings Identity" in real life. I think Common has pretty much put this one to bed by explaining what I posted before in response to these "Equilibrium Theories" - they don't hold in the short term or necessarily at all.

Now, let me take a stab at explaining the paradox of thrift in the real world: some shock to the economy causes me, the consumer, to reduce my consumption and increase my savings (thus the "thrift"). In response, producers cut back production to match my demand, leaving capacity underutilized. Underutilized capacity discourages producers from investing in new capacity. Similarly, banks don't want to loan money to a producer for an expansion project because the prospects for return on that investment aren't sufficient to cover the fixed costs of the old capacity plus the new. So consumers aren't consuming, producers aren't consuming or investing or building inventory, banks aren't lending, and every time someone looks at GDP, the picture keeps getting worse, causing consumers to cut consumption more/try to save more, capacity to be further underutilized, investments look worse, etc., etc.

So, add to that feedback loop, the Government's role. As incomes and profits decrease, tax revenues fall. Without running deficits, Government has to cut jobs and and services. So now, all components of GDP are in a downward spiral. This downward spiral spawns all kinds of negative, long-lasting externalities and suffering.

If you noticed, I didn't mention consumers investing in residential construction. Normally they would, which explains why housing is usually one of the leading cyclical sectors to recover, pulling the economy out of recession. In our current situation, the existing housing-related debt overhang is preventing this mechanism from functioning.

First off, I'm fairly sure banks lending or not is exactly what alters the money supply. That's why the fed changes interest rates.

Just defining that money as investment doesn't make it productive!

Right, exactly. As I said: "if savings in relation to income raise higher than the relationship between investment and output, an increasing marginal propensity to save will not lead to higher total savings."

And yes, Keynes point is that by increasing G, you can force money to be spent. Unfortunately "shovel ready" projects aren't, G is fairly difficult to ratchet up and down in a democracy, and G always, always, involves some corruption IMHO.

Then we need to fix that as much as possible not assume it is impossible and therefore assume there is no need for Govt spending.

It's the nature of the beast. Instead of trying to figure out how to put a screw in with a hammer, I'd prefer to just use the screwdriver. Government failure is as unresolvable as Arrow's Impossibility Theorem. And the incorruptible, all-wise, central planner is a purely post-rapture phenomenon.

There are other ways to build long-term confidence in the American economy, such as simplifying the tax code to return to the topic. And the objection that the Republicans have is that this increased G, inevitably leads to lower confidence due to the rational expectation that taxes will have to rise.

That is why we see most of the advancements in technology today from the investments in DARPA, NASA, etc.

I just disagree. The World Bank just issued finding saying that government can do next to nothing to promote R&D, and that R&D tax credits don't work. Rather than trying to nitpick through a companies finances to determine what does and does not qualify as R&D, I'd prefer to just cut their rates. There are also going to be alot of technologies that are researched, but are difficult to monetize, because of taxes levied on transactions. When you look at NASA and compare the developments they gave us to the amount we spent, it's a terrible deal. The ICE, the Ipad, and the Spinning Jenny were not created in a government lab.

The second world war was a huge stimulus economically. The government would never have been able to justify that much spending in peace time to stimulate out of a depression.

No one was rich during the second world war, and the economy was one of ration cards, not prosperity. When Truman slashed government spending, all the Keynesians thought the sky was going to fall, but instead it unleashed a decade of economic growth. If you look at what government does when you give them money, the second world war is a great example. It kills things.

If domestic and government was truly that effective at creating growth, L.B.J would be remembered more fondly. Instead the Vietnam War spending and the Great Society sent the country into a current account crisis and economic stagnation. Government pays people to not work or to die.

I don't deny that there are market failures, it's just I believe
Market Failure < Government Failure

To a greater degree, we should just live with the fact that there are some socially useful investments that are not going to be made, rather than risk the socially destructive government investments than also inherently corrupt our political process.

There are other options to kick start an economy. We could look at increasing inflation, I know NGDP Targeting has been an idea being bandied about. I suggested an idea above, which was to replace the payroll tax with a consumption tax, triggering a wave of consumption in tax avoidance and effectively appropriating money from savers. I don't know if it's a good idea, but it is an idea.

What I do not want to do is give Obama or the Republican House a blank check, turn off the lights, and trust them to serve our interests.

I can see clearly how taking more money from the rich (for no other reason than being rich), will make a rich less richer. But I still struggle to see how the 'strategy' will make a poor richer?
Even if you take it all the money from the riches, there is a reason why THEY are rich in the first place, because they know how to produce and be productive.
So before you know it, they will be rich again, and the rest will be poor again. Or even better we will all be poor.

It isn't that simple. The solution isn't about redistributing but of adjusting the rewards for labor vs rewards for capital. The free market proponents say that the government should be in the business of fixing rewards for labors (i.e., wages) and they would be right but naive.

The government already significantly affects the rewards via the tax treatment. Along with the Fed, by making capital cheap and taxing returns on capital very little compared to labor, they provide an unfair advantage to people with monetary capital vs people with human capital. This skews the rewards towards those that deal with capital.

There are several false premises set up to justify the above and it is a mystery how the 99% within the Republic Party who depend primarily on rewards of labor bought into this.

First false premise is that this capital has already been taxed as labor and therefore shouldn't be taxed much if at all for the investments. But a very large part of the riches in the country is made by people handling other people's money, not their own after-tax income. Moreover, one can make money by borrowing and making sufficient returns on it with no income involved anywhere, especially when Fed has made money cheap.

If one did want to reward investment of after-tax income, it is possible to do so by giving tax-credits for investing after-tax money from income so that it is taxed at a very low tax rate if at all and people who gain income from other people's money or borrowed money would not be treated preferentially over wage income. But the people who are spreading this myth fall in the latter category while using the 99% with their paltry after-tax income as the excuse.

Second false premise is that all of the money invested as capital is productive and leads to jobs, etc. Again this is a tale of the people who stand to benefit the most using a myth to point to small business owners, etc.

Most of the capital that circulates in the equity market for example are just derivatives on the underlying shares not money that goes into the company (a lot of companies don't need that money at all, they are sitting on a lot of cash) where it can be used for new products, growth, etc. It just transfers money between investors and gains come from the asset inflation. When you get into higher order derivatives, the situation gets worse. While there is some indirect benefits in terms of market liquidity, ability to provide stock options, ability to tap into equity markets, etc., for the companies that may lead to growth and jobs, for most companies this is not true (consider Apple for example, none of the churning of its stock has any effect on the company operations).

Again one could differentiate tax treatment for capital that creates jobs by giving credits when jobs are actually created rather than assume all capital creates jobs. Capital can be used to create jobs outside of the US as easily (and in some cases more easily) than in the US. But again the people who stand to gain the most have a vested interest in keeping the myth going.

When people talk about tax reforms the above isn't what they are trying to fix but further obfuscation of that imbalance of treatment between capital and labor.

This really came home to me when I switched from work wages to self-employment where my tax marginal rate went to 0% (yes 0%) on the income taxes and because most of my self-employed income was channeled into tax-deferred instruments, my investment capital gains and qualified dividends weren't taxed at all!

The only tax that could not be avoided was the self-employment tax which is the payroll tax for social security and medicare for the self-employed. The irony is that I create no jobs while self-employed but created plenty of jobs when I did my startup company but had to pay high income taxes on my wages for doing so and I had to pay maximum but lower capital gains on investment income. Got zero tax benefits personally for creating new products and new jobs. On the other hand, if I had started a mutual fund or a hedge fund and handled other people's money and paid myself a percentage of returns, I would have paid low capital gains instead of the much higher income taxes and I would not have created as many jobs as in the startup.

The rewards for labor and capital are definitely not in a free market system given how perverse the tax system is in punishing labor over capital. I haven't seen a single tax reform proposal that actually fixes that perverse system.

My question remains though, and I see your points about Capital and Labor. How changing that scheme will result in a poorer becoming richer?

"First false premise is that this capital has already been taxed as labor and therefore shouldn't be taxed much if at all for the investments."

You are forgetting the risk factors here. Why would somebody using his own or other people's money, go through a process of taking risks in volatile markets, only to be taxed the same way that he would be by getting a good job?

"But a very large part of the riches in the country is made by people handling other people's money, not their own after-tax income."

How do you know that? When I check the list of Fortune 500 American Richest, the large majority arent hedge funders but industrialists and celebrities.

"Second false premise is that all of the money invested as capital is productive and leads to jobs"

Well that's a yes and no, but not a false premise. People with MONEY do create jobs - even if its the nanny or gardener of a hollywood star, or indirectly the maintaining of positions in the banks they bank, etc. Some will create jobs as in extending their companies and employing more people; others will simply retire and enjoy their good fortune. Truth is there is nowhere that says that an investor or rich is forced or obligued to create jobs.

With all these attacks on the rich, the only possible outcome is that we end up getting neither: riches to live better, or riches to help others to live better.

"And should I assume that you are completely unaware that to a substantial extent, wealth in the USA and around the world is hereditary?"

1. How do you know is a "substantial" extent?
2. And if that was the case, so what? Not only it would be a good thing, but also a sign of success of previous generations.

Or what do you suggest, that everybody is reset to zero when their born and the hardwork of their parents to leave them in a better or more comfortable position is erased and their wealth confiscated?

I am one who prefer to see more people born to wealth than to poverty. Those with wealth will probably do one of this 2 things: keep building on their ancestors legacy, or simply enjoy and live well - because they wont need most of the public safety net services (like public education, health services, public transport, etc), then these resources will be better used by those who need them.

In short, the main goal of a society should be that more people create so much wealth that it passes through generations, the more the best.

There are two problems with this statement. One, the reason you get returns in the market is because you take the market risk, otherwise, you don't. The higher the risk you take, the higher the potential returns. So the market prices in the risk in the returns.

Second it is a fallacy that jobs don't involve risks. I took more personal risk than any capital manager in doing a startup for the rewards that the market place provides. With the same logic I could have said, why do a startup if I have to pay very high taxes on the income?

Anyone with "employment-at-will" jobs is taking a risk in a job. Career risk, unemployment risk, workplace risks, etc. Your logic is also like a fireman saying, they take a personal risk of death in their job, why would they do it if they are being taxed heavily on their income? They do it because that is what they are being paid for.

It is one thing to say that nobody should be taxed but that is a different debate. It is not reasonable to say that the risk taken by capital is more (which is why the rewards exist) and use it to justify lower peferential taxation.

As long as you have a system that does need to raise taxes (and whether it should or not is a different debate), the taxation of labor and capital should not be lopsided.

The current system results in the gains being limited to the ones who have capital making them richer while the population who have to depend on their labor get poorer. It is not really a free market but a consequence of the taxation system that favors capital over labor. As argued earlier, there is very little justification for it but exists because the people who gain by capital have the most political clout and increasingly so to affect taxation with myths and fallacies.

Regarding the rich, we are not talking about the 0.0005% on the list. Mitt Romney hasn't created many jobs at all for the gains on his capital since he left private equity. It is not a criticism of him but the reality is once you have capital, it is much easier to build riches with it than my labor or new training (investment) for labor. This is a problem made worse by taxation. The way to judge this is to look at the total income at various levels and you will note that the gains for most of the top 1-2% come almost entirely from capital gains than from income.

The question is not whether you increase taxes on them to benefit labor. If it is possible to cut taxes on labor as well to capital gains rates, then do so. Some people have plans on this but it is not very realistic. So the next best thing is to equalize the spread to something more reasonable. If it affects the rich more, then it is not because of class warfare but because the previous system was biased towards them. This lets the "poor", actually the middle class who depend entirely on the labor to get more rewards for their labor and hence get the consumption power that makes the economy grow. The lack of demand in consumption is tied to the reduction in consumption power of the middle class and that is what hurts the economy.

That is how you let the poor become "richer". Then perhaps, if they can save enough from their income, they can even participate in the capital market to a greater extent that will help with capital availability even more. This is what it was earlier but the treatment of labor vs capital has made the situation worse both in taxation and regulation over the last two decades.

"Well that's a yes and no, but not a false premise"

I said the false premise is that ALL capital movement creates jobs. It doesn't. I mentioned that you can encourage capital that creates jobs by tying the tax credits directly to capital that creates jobs, not give a blanket deduction for all capital because SOME capital creates jobs.

For example, in the canonical small business owner that is held up as an example, give credits for revenue raised in job creation within the small business, but it makes no sense to give preferential treatment to capital gains of that business owner for his investments in gold and oil derivatives because "small businesses create jobs". My own current situation shows that I am able to build my net worth much more easily now by dabbling in capital that I have than creating startups because of the tax penalty of creating companies with wages. Makes no sense.

One of the suggestions I had made last year in these forums is that the tax rates for labor and capital should be self-correcting and tied to economic conditions.

When unemployment is high and capital is cheap, capital taxes should be higher and payroll and income taxes should be lower. This encourage more use of the human capital by companies to grow than sit on it like many companies do. When employment is high and capital sparse, the opposite should be the case so that it encourages more capital generation when it is needed and prevents over-heating employment situation and corresponding wage inflation. Such a self-adjusting system will actually settle into a narrow equilibrium instead of this wild swings in taxation with ideological battles.

I have sent the details of this to presidential candidates and the Whitehouse. But the problem is that such a suggestion is ideology neutral. So it has very little chance of being considered in the current climate even if it was seen to have merit and be practical to implement.

First of all, Presidents cannot set economic policy. Congress does (or in the GOPs case doesn't). Clearly, if President Obama's proposals were enacted, the benefit to the incomes of the 99% would have been greater, and rightfully so given marginal propensity to consume and consumption:GDP. Instead, we got obstructionism, austerity, and compromises for the 1%.

Second, income increase is only one measure of recovery and doesn't consider the counter-factual. What would have happened to incomes if the banks and auto industry hadn't been bailed out? The 99% would have been even more disproportionately adversely impacted as unemployment soared to 15%, foreclosures spiked, and the safety nets and stae budgets ran dry.

Your second question is well-taken. The answer is that most people have forgotten middle school social studies and haven't read Toqueville to remind them of the purpose for America's political structures.

You don't get it WW. The recent rise in inequality is the long arms of Bush and Reagan at work. If it weren't for Obama, the 99% would be on bread lines. And if it weren't for the Republicans, Obama would've blessed us with full employment primarily from a green energy boom and he would've raised taxes on the 1%, practically eliminating income inequality.

Science be with you, brother, as you speak the gospel of the Prophet Obama. For he shalt stretch out his hand, and Lo! the sea-levels shall fall. For he shalt raise the corporate income tax, and Lo! businesses shall hire. For he shalt subsidize organic food, and Lo! we shalt eateth the salads.

Also, I fail to see how raising taxes on the ridiculously wealthy's income after the first 2.5 million hurts the economy. Republicans love to talk about the moral climate of the 50's, but they forget the economic one, namely that the max income tax rate was 94% and we had two decades of uninterrupted prosperity.

Was it prosperous because taxes were high? Probably not.

Does it mean that it's a self serving lie to say that taxes on the rich spell instant economic doom? Yes, it does.

94% is definitely on the wrong side of the Laffer curve but most economists think that the current rate is too far to the left, as in raising the tax rate would raise revenue.

But let's say, for the sake of argument, that there was 100% tax rate after 2.5 million dollars. Would we suddenly see an epidemic of unemployed investment bankers because they refuse to get out of bed for anything less than 3 million? Of course not.

Did executives in the 60's work less hard or produce less value because they were only paid 20 times the amount the average worker made instead of 520 times?

When you raise income taxes, people try to avoid them by putting their money into other vehicles. Reinvesting in the business, buying property, giving to charity etc. All of these activities are better for the economy.

My basic contention is that once the numbers are big enough, people will work just as hard for 2.5 million dollars as they will for 5 million dollars. (If they can be halfassed and still getting millions of dollars, there is something very wrong with the incentive structure in finance.)

If there was a 100% tax on income over $2.5M, you'd see investment bankers retiring a lot earlier. On average, people in the 60's worked less. A lot less. The Laffer curve isn't a measure of any one individual's propensity to earn but the entire economy's. Higher taxes may not cause you to choose to earn less but someone will make that choice so that in the aggregate, marginal tax revenue decreases.

Would the rest of the economy seriously suffer by the loss of investment bankers? Is the service they provide that critical? I sort of put two points together in my last comment. The first being that we are to the left of the Laffer curve and that shifting it right would not cause economic apocalypse.

The second is that the financial services sector is massively over valued and that you could massively reduce the payrolls of the average investment banker and not lose significant amounts of services. (If a whole bunch of people retire early because they can't get 10 million a year, I'm sure that whole in the labor market will be filled by graduates willing to work for the pittance of 2.5. At that rate it will take them almost two weeks to pay off their student loans)

But let's bring it back to real numbers, are they going to retire because the top rate returns to where it was in the Clinton era?

The Laffer curve for high income marginal tax rates is somewhere from 35 - 70 % depending on which economist you look at. We're sitting on 33% and the Clinton one was 39. (Though I too remember the Clinton years and how everyone cursed the severe financial services shortage.)

I think before we start getting into a discussion about marginal rates on income, we should remove the loophole that allows the financial sector to have their wages taxed as capital gains. The carried interest deduction.
I'm all for the lower rate on capital gains, but working at a hedgefund is working.

The value added by private equity is captured in corporate profits which are taxed and shouldn't be taxed again. Taxing carried interest as earned income would create the undesirable situation in which partners who contribute capital are taxed at the capital gains tax rate and partners who actually work are taxed at the higher earned income tax rate even though they're taking a slice of the same pie.

The median salary for a doctor in America is 120,000 to 200,000 a year, depending on specialty and where they work. They are unaffected by income tax increases on income over 2.5 million.

Most small businesses, restaurants, hardware stores, etc. also do not generate 7 figure incomes for their proprietors.

Mark Zuckerberg would probably still have invented face book even if it only made him a millionaire instead of a billionaire.

My contention is that taxing the ultra rich will not have a significant economic detriment for the rest of society, as most of society operates well below that pay scale. ("No effect" would be impossible, but the current rhetoric is that higher taxes on high earners would "destroy the economy")

I think it's evident from the inanity of some of my previous posts that I require neurosurgery, and so your tax increases would fall on my doctor. :P

I do think that we are taxing the rich too little to be on the Laffer curve, and I think both of you two do too. I just don't think that the republicans want to have the rich treated like fish and harvested for the highest sustainable catch. That's the objection.

I would like to know how the presence of deductions and other inefficiencies affects the Laffer curve. Due to the increasing propensity to engage in fraud and/or economically destructive tax avoidance, I would think it would make the sustainable catch lower.

Also, if your objective is to promote equality, you would have higher taxes than the Laffer curve would dictate, as the damage to the rich is considered a plus.

And I don't get why it's bad that partners who are invested in a fund would get taxed at the cap gains rate, but that those who worked there w/o investing would have to pay the wage rate.

Equality as an end isn't worth pursuing. What you want to pursue is equality of opportunity and equality before the law.

I don't really think there should be a difference in the money one gets from wages or capital gains, but that's not my problem.

My problem is that the proponents of the Bush tax cuts have been prophesying doom and destruction upon the economy were taxes on the rich ever to be raised (or more accurately, returned to Clinton levels.) Which is silly as the economy trundled along just fine under Clinton.

It's a narrative where the ultra rich are saying that they are the absolute lynchpin of the economy when they are not.

Yes, but the blog was about inequality. I was just pointing out that this is incidental to whether or not the administration is promoting inequality.

You know there was also dramatically rising inequality under Clinton too, so the real question is how unequal we get to become.

Equality,
And why do you think that equality of opportunity is any more possible, or even desirable, than equality of outcome. One of the things that people put their resources into their kids education and development. People have different parents and some parents are better to their kids than others. Without breaking up families and having children raised by the state, you're going to get inequality.

I think it would be weird to make a law that says that people can't help their kids, and there are plenty of Pareto optimal scenarios that are going to involve helping kids above and beyond average.

Also, there's always just random chance. Every once in a while something just really good or really bad happens to people, that's just the nature of the universe.

The world ain't fair, and it ain't ever going to be. We should just try to make sure that our society "does right" by everyone and does "its best" for people in general. Equality should just be ditched as an appeal in normative economics.

I don't think Mr. Saez' comment is that crazy at all: as you yourself point out, Obama saved the financial sector, and much of the income gains are likely bailout bucks. People can see that without measuring income elasticities.

Considering the substantial majority of Americans in favor of increasing taxes on high incomes, you'd think that the Democrats would take advantage of an election year to force the GOP either to agree to higher tax rates or to take an embarrassing stand against them.

Decreasing after-tax inequality is doable no matter what the underlying cause of pre-tax inequality.

Do you honestly believe that's reasonable? That it's the government's responsibility to punish people for victimless moral crimes? Or that increasing the price of liquor will deter people who have their hearts set on getting drunk?

Alright, to actually make a real point here about income inequality and what people call sin taxes, or if you are slightly more sophisticated "libertarian paternalism"...

I think it's important to recognize that when you you take money from people for doing things that are thought of as leading to poverty, and subsidize people for doing things that are thought of as leading to higher wealth, you are effectively taking money from poor people and giving it to rich people. This same is true if you are subsidizing "access" to what are thought of as marks of the middle class - you are really just subsidizing the middle class.

Poor people drink and smoke too much in this country. This is one of the reasons that they are poor. So the government decides that it is going to "encourage" them to act more like responsible middle class people by taxing them. For all intents and purposes this is like taxing people FOR being poor so they'll stop doing it. Thus we get government policies to the poor that are essentially just paternalistic schadenfreude.

Same thing when you subsidize things that the middle class buys so that poor people will have "access" to them. If you wanted to help them, you would give the actual people money, and they would spend it on the things they wanted. Instead you subsidize the things that upper middle class people want, like organic food, that poor people really aren't trying to buy. Your just giving yourself my money Michelle Obama and expecting us to like you for it. Same thing with Electric Cars, it's just a handout to the type of people who buy electric cars. The effect on consumption is minimal. It's even worse when we try to help people who are addicted to things by locking them up for being addicted to them.

But this isn't just about little things like electric cars or cigarettes. This applies to big things like home-ownership too. In order to promote home-ownership we take money from people who don't have homes and give it to people who do. This is very regressive and completely insane and in no way helpful to people who don't have homes. Also, take college education. Not everyone goes to college - but kids from middle class homes or people who are going to become middle class (from going to college) go to college, so if you subsidize college you're just giving money to the middle class from the poor. Your are probably doing little to actually increase consumption, simply subsidizing rich people.

In the state I am currently stuck in right now - California - there are huge fights going on over funding higher education. This is portrayed as giving poor people "access" to college, but actually it's money that could otherwise go to K-12 education which everybody goes to, but instead democrats want to redirect it to a service for the middle class education rather than everybody's education. California, run by the democratic party, is comparatively great to middle class people compared to poor people compared to Virginia, the conservative state I moved from.

This social engineering is really regressive, and the Obama administration does alot of it, and therefore I think it's fairly easy to portray Obama as unintentionally against promoting equality.

When you try to use government to "help" poor people, remember that everything the government does is coercion, and generally coercing people around doesn't make them better off. Wealth is actually about being able to buy things you want. If you are trying to help poor people, start by respecting them enough to stay out of their business.

I think Barack Obama's cutting the Payroll Tax was a great idea. Far better than his idiotic paying people to not get a job for 99 weeks idea. I think it should be made permanent and that we should focus more on marginal tax rates of the poor generally.

The extension of unemployment insurance was the form of stimulus that had the highest multiplier, according to the CBO. I've also seen statistical evidence that extension of unemployment insurance does not drive wilful extension of unemploymen, despite your juvenile, knee-jerk, anecdotal, "common sense" claim to the contrary.

I give you credit for not falling in line with the Republican drones who now oppose the payroll tax cut because The President supports it. But that doesn't make up for your refusal to give up on these other unsubstantiated, failed notions (like libertarian aversion to Moral Hazard trumping all practical benefit of externality adjustment by central government).

I don't know where you read that extending unemployment insurance (we are talking about the extension and not the normal six weeks right) did not increase unemployment, because that is insane. When you pay people not to work, they don't work. What is up with you guys dismissing an argument just because it is obviously correct?

The debate was never about whether extending UI reduced the incentive to work, it was by how much, with it's effect on the unemployment rate being estimated at anywhere between .4 to 2 percent by studies. A lot of people thought that the trade off between averting people suffering the effects of joblessness and the harm of increasing joblessness was a good one. That is a respectable opinion, saying there is no trade off at all is not. It's one of the reasons that the unemployment rate has been a lagging statistic in the recovery.

The republican House, by the way, did not oppose extending the payroll tax cut. They insisted on making it one year rather than two months, but the democratic senate couldn't manage to close the deal. They pushed the President's request, it was opposed by members of his own party and then the President had to switch sides. Never mind the effects of uncertainty on the economy.

And that was a pretty quick dismissal of what was, actually, quite a long response on why government shouldn't practice libertarian paternalism. Also, I did not make the case on the basis of "moral hazard", but rather because I was arguing that it is inherently regressive.

I will acknowledge that if your argument was that the demand side effects of extending UI are stronger than the effects of paying people not to work, then you are not insane. I think you are wrong. But that was not the argument you were making...

"extension of unemployment insurance does not drive wilful extension of unemploymen"

Scroll down to the charts from the cbo that ranked the employment and GDP impacts of various initiatives.

"Paying" someone $400 per week max is not enough for them to not work on aggregate. Yes, there may be the statistically insignificant anecdotal behavioral outlier. $400 per week max. It's enough to keep an average family afloat, not have your home foreclosed on, but don't misrepresent it to be equivalent to a sustainable income. It's a fraction of what they earned and are probably committed and indebted to spend. Keep claiming otherwise and show how out of touch you are.

Your argument about social policies being regressive rests on two false premises. First, progressive taxation and basic exemptions preclude regressivity. Second, the intention of these policies is not simply to improve their individual lives, it is to increase overally productivity and utility of society (e.g. Discouraging smoking reduces illness, cancer, and allocation of resources to health care).

Look, none of that says that extended UI doesn't create an incentive to remain unemployed. Except, as per usual, some slapdash comment by Paul Krugman. They took issue with some casual analysis of someone I had never heard of before, and yes, 2.7 percent does seem very high.

The issue is not what the "average" family does. The point is that people respond to incentives on the margins. This is a principle. If you reduce the marginal incentive to work, fewer people will work.

Remember that UI is not necessarily a family's only income. People have spouses, savings, informal employment, and such. At first you said that the response to the incentive was nonexistent, now that it is statistically insignificant. Again, let me reiterate that the analyses I've seen have been in the .4 (SF Fed) to 2 range. I believe Larry Summers said definitely .5 or more, so we're talkin the Administration here.

Here's the CBO
"A rough rule of thumb is that making benefits available to all regular UI recipients for an additional 13 weeks increases their average duration of unemployment by about two weeks and that increasing UI benefit levels by 10 percent increases the average duration of unemployment by about one week."

That's actually surprisingly low, but still a major effect on the labor market.

All this is not to say that you cannot stimulate aggregate demand. The thing I was taking issue was linking receiving stimulus money to not working, which is, as I was saying before, a worse idea than giving them the money without conditions. You are the stingy one here.

But Crimson,
This all seems like a disproportionate amount of hate from the blue team for posting about concerns about our tax code being too regressive, that's right too regressive. And that marginal rates on poor people are very very high. And all this came from saying one of Obama's policies was better than another one, a point that was actually completely incidental.

And next time, please try to link to a source at least as respectable as Brookings.

Aaahhh, I just realized that all this is actually in the complete opposite vein of the argument I had originally been trying to make, which is that the government worries too much incentivizing poor people.

Nonetheless, if I don't think that it should incentivize them to do good things, I think that in the very least we should have been able to agree that it shouldn't incentivize them to do bad things.

OK, I am going to turn this all into a "government sucks at incentives" point, and just say screw the man. And now I am going to respond to your other hurtful comment in the chain above.

"First, progressive taxation and basic exemptions preclude regressivity". I am not entirely sure what you mean, but Alcohol and Tobacco and the putative soda/sugar/fat/carbon taxes are not scaled on the basis of a persons income. They are excise taxes.

Your second objection is that it benefits society when we punish poor people. We'll, OK, that's great, but we're still punishing poor people.

I'll quibble with the claim that "Saez's comment that 'Such an uneven recovery can help explain the recent public demonstrations against inequality', is completely ridiculous." This is advanced on the grounds that no one has been consciously aware of the fact that the recovery was so inequitable until Saez's work.

But Saez's thesis doesn't seem to depend on the public knowing why the recovery was uneven or even that they know it was uneven. Rather, he seems to be suggesting that the unevenness itself drove dissent.